Happy New Year to my readers, let us hope 2014 can be as prosperous for equity investors as 2013, this is certainly what a lot of equity analysts seem to be predicting. As we enter 2014 fear appears to be in bonds and greed in equities. I can now reflect on the past 12 months and take a look at the year ahead. One of the biggest developments of last year was the move by central bankers to inflation targeting after many years of anti inflationary policies. Many attribute this move as a large part of the reason for the more than 20% gain in global equity markets in 2013, in contrast global bond investors lost 2.5%, the performance in bonds was flattered in particular by the recovery in the peripheral bond market. Spanish 10 year bond yields started 2013 at 5.2% and finished the year at 4.2%. US bond investors did not fare so well as 10 year yields rose sharply. Earlier in the year I demonstrated how peripheral bonds had benefited from the monetary policies of Japan and America in particular, this appears to have continued throughout the year. The great rotation out of equities into bonds that many including myself predicted did start to occur, as equity holdings started 2013 at multi-decade lows. The uptick in M&A that many also predicted materialised in fits and starts, the big one was obviously the move by Verizon to buy back its shares from Vodafone.
As we start 2014, global equity valuations, despite their rise, remain below their average cyclically adjusted price earnings ratio of the past 30 years according to BCA, and look even more attractive when compared to credit. Having said that, one has to remember that the US equity market rose over 25% on the year whilst earnings only rose about 5%, indeed most developed markets enjoyed a rerating as prices fared better than earnings. Analysts have pencilled in an average of 11% earnings growth for US companies for 2014, as historically they tend to start the year with rose tinted glasses only to have to moderate expectations as the year goes on, I would not be surprised if this were to occur again this year.
At this time last year I talked about the "Christmas luncher", investors who look for next year's winners from the preceding years losing stocks. Those who picked the mining sector would have done poorly again in 2013 as this was another year of under-performance for that sector; gold stocks were hit particularly hard. Indeed one of the best trades of 2013 was to be short gold and long Greek equities. This year's Christmas luncher would be selling airline and pharmaceutical stocks and again be buying mining shares. According to the December Merrill Lynch Fund Manager survey mining and energy stocks are the most under owned by fund managers entering 2014. Consumer discretionary and Industrials the most loved. It would appear that as yet not many fund managers are prepared to bet on a recovery in the mining sector.
One of the most remarkable developments to me of the past year has been the bitcoin, a digital currency. I must admit try as I might I am not sure I really understand the concept, so on that basis I stay well away.
Global stock markets started the year on a softer note, giving up just under 1% on the first day of trading of 2014. US treasury yields continue to hover around 3% for the 10-year bond. It does not take long for economic data to be released and analysed. Over the past couple of days we have had December's purchasing managers index for China, coming in slightly below expectations. In the US December's ISM manufacturing index edged back to 57. The most interesting data comes from Europe as the eurozone PMI final reading was confirmed at 52.7. One notable difference was the reading between France and Germany. France the headline PMI was revised down for December to 47, indicating a contracting economy, Germany on the other hand index was raised to a 30 month high. I believe the tensions within Europe this year will come between Germany and France as the two economies continue to suffer different fates within the constraints of the euro. The one thing that is certain, as occurs every year, there will be unexpected developments that will test investor's nerves and it will come when investors least expect it, as usual causing the most pain.